Monday, December 30, 2013

Preference shares listed in sgx

Preference shares are quite similar to bonds. Unlike bonds, preference shares might not be able to pay out dividends in certain years, but that usually means that the ordinary shares holders won't get their dividends too. If bond issuers are unable to pay out coupons, they will be in default and that's very serious because it means that a lot of debtors will also be howling for their blood.

Click for a bigger pic. Check the data yourself, I might be wrong.

I've written extensively about the basics of preference shares so I'm not going to repeat. Here's a backlog of articles if you want to find out more:

1. Preference shares Part I
2. Preference shares Part II
3. Preference shares Part III  
4. Preference shares Part IV  
5. Hyflux preference shares Part 1, 2, 3                                        

I will highlight a few keypoints though:

1. Unlike bonds, preference shares often have a optional redemption date. That means if the issuer wants to redeem back the preference shares, they can only do so on or after that date. If they didn't redeem it on that day, or if they don't have a optional redemption date, that means the preference shares will run perpetually. This is very different from a bond because bonds must expire on its maturity date. No ifs and buts. There is a very real possibility of having your money stuck inside here if the issuer choose not to redeem back at par, though you can choose to trade it off on the secondary market like normal stocks.

2. Some preference shares are convertible. For example, Citydev NCCPS has this convertibility option where each preference shares held can be converted to 0.136 CDL 'mother share' + $0.64 cash. While waiting for that event to occur, you'll be compensated with 3.9% pa coupon yield. Most preference shares are not convertible, and neither do they hold any voting rights.

3. Newer preference shares are smarter. They have different coupon rates before and after the optional redemption date. For example, OCC 5.1% NCPS 100, which replaces a recently expired one, has an optional redemption date of 20th Sept 2018. Before this date, the bond will pay out 5.1% pa coupon yield. After this date, if they choose not to redeem back the preference shares, they will give out 2.5% + 3 months SOR. The payment schedule will also be different. Before the optional redemption date, it's paid out semi-annually on Mar and Sept. After, it's Mar, Jun, Sep and Dec.

4. There's this cumulative and non-cumulative part too that needs highlighting. Cumulative means that if in a particular year, the preference shares didn't pay out any coupons, this missed payments will be accumulated and paid out in full in the next year, together with next year's payment. If they miss payments for 10 years, and they decided to pay out on the 11th year, they will have to pay a total of 11 years of payment altogether on the 11th year. Hyflux preference shares is a cumulative one, while all the banks offered are non-cumulative in nature. Whether it's cumulative or not speaks less about the safety of the preference shares and more about the perceived riskiness of the underlying company. More had to be done by a riskier company to entice the market to bite their offered preference shares. Hyflux is the only cumulative preference shares among the lot listed in SGX.

5. Whatever applies to bonds generally applies to preference shares too. Preference shares is like a hybrid between stocks and bonds. The upside of preference shares are capped, but so is the downside. In between, you'll be getting a higher dividends than ordinary shares to compensate you so there's really nothing to complain about. Just don't get into preferences shares to participate in capital gains.

So, here lies the ultimate question: between bonds and preference shares, which is better? In my opinion, bonds are better. The thing about bonds is that you want to invest into something, get paid yearly without caring much about the ups and downs of the price, and upon maturity, give you back the entire capital invested. You just need to worry about whether the company issuing the bond can survive that period that you invested in their bonds. Worry and fuss-free, you can almost treat it like a high class fixed deposit, with a fixed interest rate and capital guarantee upon maturity. For preference shares, there's always this problem about whether you can liquidate them when you need the money, since it can theoretically run forever.

If you have a far investment horizon, had set aside a sum of money that you won't need until you retire, then bonds or preference shares wouldn't matter anymore. The best is still to buy below par value, so that a capital gain is locked in upon redemption. If not, the earlier you buy, the better. Just look at it this way: if you have a preference shares that pays out 4.5% pa and the price is 109 now, you just need 2 years to break even. So the first 2 years are the 'riskier' period of this investment. After that, anything more is your bonus and according to bro8888, your pillow gets stuffed with more and more feathers.